The trade race – which currency will rule the world?

While the Digital Yuan pursues a position as global reserve currency, the pluralistic world of money suggests a new financial world order full of competitors

Latin America experiences Bitcoin mining frenzies, Asia sees a rise in CBDCs and the Middle East has their own crypto projects not linked to Fiats. Is has become clear that crypto is transitioning to a new phase of adoption. Instead of some few brave innovators experimenting with digital money, we have reached an early adoption phase, in which institutions and individuals alike realize the necessity of being on the forefront. Late adopters will be the ones who do not seek the benefits of crypto anymore, but who will be the ones suffering from late action, desperately trying to catch up.

So far, the West is falling behind. The EU is no where near issuing a CBDC pilot or embracing any one DeFi, and the US is far behind their rival China in CBDC development. Jerome Powell, chairman of the Federal Reserve of the US, seems relaxed on the issue, stating that it was not important to win the race, but to “make it right”.

However, the issue is quite serious for the world’s largest superpower. The 90s are over, and the competitors to the US are stronger than ever, developing major innovations and growing their economies much faster than old Uncle Sam. The trade race has been familiar to anyone following up on politics for a while now, but the question on the new financial world order remains obscure to many.

The status of the US-Dollar as global reserve currency might be at stake. Digitizing a currency comes with many advantages that make the Digital Yuan, the CBDC of China’s central bank, much more attractive than the analogue greenback. There are zero transaction costs, nearly instantaneous payments and the highest form of hygiene. The Covid-19 pandemic has boosted the demand of digitization due to that final factor.

But most valuably, and the logical reason for many countries to turn away from the Dollar, it is not the Dollar. At the end of WWII, the Dollar established its dominance, beating the Soviet Rubel due to stability. Economic strength elevated the Dollar to a stable and easily transferable winner over the inflationary counterpart. Unprecedented power came with the global reserve status.

Up to this day, the Society for Worldwide Interbank Financial Telecommunications (SWIFT), monitors global financial transactions using the Dollar, enabling the US to easily penalize enemies. After all, 88% of global trade interaction use the US-Dollar, followed by the Euro and then the Japanese Yen. So when the US launches sanctions against China, there is hardly anything to lose. China can counter, but to what extent? The Renminbi, despite being issued by the second largest economy of the world, has little impact on the US when it comes to sanctions.

Precisely that is why the Digital Renminbi bares chances for China. It was quick to establish a digital payment bridge with Iran, another heavily sanctioned country, to circumnavigate any penalties and facilitate interaction. This may weaken the muscles the US likes to flex, empowering its enemies.

But that’s just a kick starter. Their support wouldn’t last for long if they were the only supporters. However, the most American brand of the world, McDonald’s is full in on CBDC payments even before the pilot project ends. International corporations like that are a big thing. The threat is turning real, Uncle Sam starts shivering. So, who will be the winner?

Maybe DeFi. While the first Cold War between the USSR and the US saw countries seeking neutrality, the second one has a whole world of neutrality behind it. Despite recent price dips, the crypto industry is covering ground at a rapid price, seeing mass adoption in South and Meso America. El Salvador made the step to adopt Bitcoin as a legal tender.

And received major backlash for it, for the typical arguments of crypto sceptics. The volatility is too high for a legal tender, the transparency is too low, the environmental impact too high. President Nayib Bukele was quick to find a solution for the latter, drawing mining energy completely from geothermal energy from volcanos, making domestic blockchain forging 100% green.

Volatility remains a major issue. If a tweet by Elon Musk can karate-chop the value of a currency in half, and then elevate it by several thousand Dollars, it is not attractive for central governments. For example, the US criticized El Salvador, and while a certain threat to the Dollar, which is also legal tender in the Central American Republic, possibly exacerbated the stance of the US, the government has maintained a rather positive position on crypto in general, especially on stable coins.

For them, DeFi money that has its value linked to the US-Dollar, will even be a major stabilizer in the currency battle against China. Heister Peirce, commissioner of the SEC (Securities and Exchange Commission), defended coins like Tether or even Diem, Mark Zuckerberg’s baby.

In fact, Tether is strong and would be a viable option for many economies, however despite having the third highest market cap of crypto with $62 billion, it is small in comparison to Bitcoin with $1 trillion.

Considering the aspect of transparency, crypto is much more attractive for many private individuals than a central Digital Yuan. Blockchain money was invented as a project to protect democracy and independence, by hindering authoritarian governments from controlling their holders.

And in fact, China is pursuing full transparency of financial interaction, claiming counterterrorism and anti-money laundering measures to legitimize zero privacy. Not only does this deter many countries from engaging in trade with the Digital Yuan, but it has also seen many sophisticated organizations of the opposition to continue Bitcoin action in the shadows.

After all, creating a truly independent monetary system is nearly impossible. Mining has to be done somewhere, and until it becomes possible to set up high powered computers in Antarctica at a high quantity, it will always underly a certain jurisdiction. So far, most of the global Bitcoin hash rate was generated in China. Large-scale crackdowns have hit a hard dent into the market cap, and while illegal mystery hash (tokens from unknown mining pools) is growing, it is not powerful enough yet to compensate the losses.

Ultimately, the crackdown. which was justified with concerns over environmental impact of Bitcoin, was a method of eliminating competition to the CBDC. The latest sting in Sichuan largely shut down operators using hydro energy, nullifying the carbon footprint argument. The results will likely accelerate the already imminent mass adoption of Digital Yuan throughout the entire state.

So will the Digital Yuan replace the US-Dollar as digital currency and destroy the growth of DeFi? In the next few decades, probably neither. China’s economy is growing like bamboo due to an incredible amount of export, but in order to make a currency strong, they will need to increase their imports as well, lest the motivation to use Digital Yuan for global trade stagnates.

And as long as the Digital Yuan enforces authoritarian surveillance, people will never stop using DeFi to protect their privacy. Making definitive statements on which currencies will come out on top would not make sense, plain and simple. What can be said though is, the race will not be as easy for China as many people like to put it. It has many hurdles in its way and the Dollar still holds tremendous power. The US seeks Digitization as well and even if their project is delayed, it is not necessarily unfit for the competition.

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